Monday, March 26, 2012

Evolving Regulation of Conflict Funding

The phenomenon of using natural resources to fund bloody conflicts is hardly new. However, international responses to it have steadily evolved and indeed are still evolving, reflecting the delicate balance of international interests, state sovereignty, corporate social responsibility and governance and the role of the consumer.

The conflicts in West Africa in the 1990s and early 2000s were financed by “conflict” or “blood” diamonds , as they came to be known – diamonds that were extracted from the affected area and then used to purchase the weapons and other supplies needed to keep the conflicts alive. After a concerted campaign by human rights groups to educate the general public on the issue and reality of conflict diamonds, the diamond industry and international community came together to endorse a global system for diamond certification. Under this system, known as the Kimberley Process for the location where it was negotiated, diamond importing and exporting states agreed to a certification system for diamonds in order to ensure that their provenance was known and to certify that they were not in fact conflict diamonds. In order to give some teeth to the system, state parties were required to be thoroughly vetted for compliance prior to joining the system and are subject to continued monitoring. Should a state party be found to have violated the terms of the system, it is eligible for delisting as a member, meaning that it would no longer be viewed as a reputable entity in the legitimate diamond market. Throughout the course of its history, the Kimberley Process has enjoyed successes as well as controversies , however to date it is the strongest international regime for preventing the use of natural resources to perpetuate conflict.

In 2010, the Dodd-Frank Act required many changes to economic and financial practices in the US and charged the Securities and Exchange Commission with a variety of regulatory undertakings . One key undertaking was the implementation of Section 1502 of the Dodd-Frank Act, which requires corporations that use other conflict minerals, such as coltan, from the Democratic Republic of Congo and surrounding states to declare this and to disclose their policies for ensuring that this use does not contribute to conflict financing or otherwise support conflict. At present, the SEC is still debating how to implement Section 1502.

There are many interesting aspects to Section 1502, the crafting of rules to implement it, and its relationship to corporate practices and consumers. On the surface at least, it appears that corporate resistance to the implementation of the essential terms of Section 1502 is not that strong, although hammering out the exact details of definitions is more troubling. This general openness of the corporate community to stopping the use of natural resources for conflict funding is in line with the corporate social responsibility doctrines that many corporate entities have adopted in an effort to function as good corporate citizens, as well as to reassure stockholders and consumers of their integrity. Interestingly, while the human rights community has been successful in bringing the connection between other minerals and conflict to light, there appears to be a greater willingness on the part of corporations to enter into reporting requirements in this context than in the early example of conflict diamonds. The Kimberley Process does entail certification of individual stones, which in essence is a certification of the practices used to produce the diamond itself. However, Section 1502 is a more overt step in reporting due to the explicit, periodic reporting requirement for corporate entities and the ability of the public to access information contained in these reports.

Certainly there are procedural and substantive differences between establishing an international system such as the Kimberley Process and domestic legislation such as Section 1502. However, it is important that these differences not overshadow the key relationship between the two because they represent the evolution of law regarding the use of natural resources in conflicts.